FINA Exam 2 Pt.2

c) rise

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will _______. A) remain unchanged B) fall C) rise D) do none of these

c) exempt from state and local taxes

Interest earned from Treasury bonds is: A) exempt from all income tax. B) exempt from federal income tax. C) exempt from state and local taxes. D) subject to all income taxes.

a) less than 10 years; 10 years or more

Note maturities are usually _______, while bond maturities are _______. A) less than 10 years; 10 years or more B) 10 years or more; less than 10 years C) less than 5 years; 5 years or more D) 5 years or more; less than 5 years

c) they are transferred into principal-only and interest-only securities

Some bonds are "stripped," which means that: A) they have defaulted. B) the call provision has been eliminated. C) they are transferred into principal-only and interest-only securities. D) their maturities have been reduced.

d) requires the firm to call bonds at a price par value

A call provision normally: A) allows the firm to call bonds at par value. B) gives the firm the option to call bonds at market value. C) allows the firm to call bonds at a price below par value. D) requires the firm to call bonds at a price above par value.

c) restrict the amount of additional debt the firm can issue

A protective covenant may: A) specify all the rights and obligations of the issuing firm and the bondholders. B) require the firm to retire a certain amount of the bond issue each year. C) restrict the amount of additional debt the firm can issue. D) do none of these.

c) debentures

Bonds that are not secured by specific property are called: A) chattel mortgage bonds. B) open end mortgage bonds. C) debentures. D) blanket mortgage bonds.

a) chattel mortgage bonds

Bonds that are secured by personal property are called: A) chattel mortgage bonds. B) first mortgage bonds. C) second mortgage bonds. D) debentures.

a) decline; more

If interest rates suddenly _______, those existing bonds that have a call feature are _______ likely to be called. A) decline; more B) decline; less C) increase; more D) none of these

b) false

Treasury bond auctions are normally conducted only at the beginning of each year. A) true B) false

c) may trade treasury bonds among themselves

Treasury bond dealers: A) quote an ask price for customers who want to sell existing Treasury bonds to the dealers. B) profit from a very wide spread between bid and ask prices in the Treasury securities market. C) may trade Treasury bonds among themselves. D) make a primary market for Treasury bonds.

c) insurance company

Which of the following institutions is most likely to purchase a private bond placement? A) commercial bank B) mutual fund C) insurance company D) savings and loan association

d) the appointment of a trustee in all bond indentures

Which of the following is not mentioned in the text as a protective covenant? A) a limit on the amount of dividends a firm can pay B) a limit on the corporate officers' salaries a firm can pay C) the amount of additional debt a firm can issue D) the appointment of a trustee in all bond indentures E) All of these are mentioned in the text as protective covenants.

e) all of these are true regarding zero-coupon bonds

Which of the following is not true regarding zero-coupon bonds? A) They are issued at a deep discount from par value. B) Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. C) The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. D) Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts. E) All of these are true regarding zero-coupon bonds.

finance companies

_______ are not primary purchasers of bonds. A) Insurance companies B) Finance companies C) Mutual funds D) Pension funds

a) competitive

_______ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. A) Competitive B) Noncompetitive C) Negotiable D) Non-negotiable

a) treasury

_______ bonds have the most active secondary market. A) Treasury B) Zero-coupon corporate C) Junk D) Municipal